Przemyslaw Radomski, CFA (PR) is a precious metals investor and analyst who takes advantage of the emotionality on the markets, and invites you to do the same. His company, Sunshine Profits, publishes analytical software that anyone can use in order to get an accurate and unbiased view on the... More

In our essay on precious metals from Nov. 22, we focused on the markets from the long-term perspective. As we wrote in the summary:

(…) the final bottom for the decline in gold, silver and mining stocks doesn't seem to be in just yet.

On the next trading day, after the essay was posted, gold, silver and mining stocks declined and dropped to their fresh monthly lows. Although we've seen some improvement in recent days, precious metals still have been trading in the narrow range.

Many times in the past, the situation in the U.S. dollar and the euro gave us important clues about future precious metals' moves. Therefore, today we'll examine the US Dollar Index (from many perspectives) and the Euro Index to see if there's anything on the horizon that could drive the precious metal market higher or lower in the near future. We'll start with the long-term USD Index chart (charts courtesy by stockcharts.com).

(click to enlarge)

From the long-term perspective, the situation hasn't changed much recently. The long-term breakout above the declining long-term support line has not been invalidated. Additionally, the USD Index reversed right in the middle of our target area. Therefore, from this perspective, it seems that the downward move - if it's not already over - will be quite limited because the long-term support line will likely stop any further declines.

Now, let's examine the weekly chart.

(click to enlarge)

Looking at the above chart, we see that at the beginning of the month the USD Index reached the 50-day moving average, which triggered a corrective move in the following weeks. With this downward move the U.S. dollar dropped to the low that we had seen three weeks ago, therefore, we might see a post-double-bottom rally in the coming weeks.

Keep in mind that from this point of view the current correction is still shallow, which is a bullish signal for the short term. As you can see on the above chart, recent weeks have formed a consolidation, which is likely a pause before further increases.

Let's check the short-term outlook.

(click to enlarge)

As you can see on the above chart, the USD Index extended its decline and dropped to the previously-broken support/resistance line created by the June low. Last week, the proximity to this support level (or comments from the Fed about the possibility of tapering the QE program - which we don't believe, by the way) triggered a sharp move up, which took the dollar above the level of 81 once again. Therefore, since this level was reached once again, it seems that we might see a similar rally once again. Additionally, the greenback formed a daily hammer (reversal) candlestick, which is another bullish sign.

On top of that, both happened right after the cyclical turning point, which amplifies their bullish implications. Connecting the dots, it seems that another move up could be seen shortly.

Let's now take a look at the medium-term Euro Index chart.

(click to enlarge)

As you see on the above chart, since the beginning of the week, the euro has continued its rally. The Euro Index moved above the level of 135 once again and corrected exactly 61.8% of its October-November decline (to 136.09).

At this point, it's worth mentioning the short-term rising support line based on the July and September lows, which is slightly above the 61.8% retracement. Looking at the above chart, we clearly see that despite the recent corrective upward move, the breakdown below this line hasn't been invalidated.

Combining these two facts, we can conclude that the move up is quite likely over and the decline can continue. If we see a move below 131.56, the bearish implications will be even stronger.

Having discussed the current situation in the U.S. currency, let's see how it may translate into the precious metals market. Let's take a look at the Correlation Matrix.

(click to enlarge)

The Correlation Matrix is a tool which we developed to analyze the impact of the currency markets and the general stock market upon the precious metals sector (namely: gold correlations and silver correlations).

The correlation coefficients remain strongly negative as far as the short-term (30 trading days) link between precious metals and the USD Index is concerned. The 10-day column includes values close to 0, which simply means that gold didn't respond to dollar's move lower - which is a bearish sign.

Summing up, looking at the current situation in both currencies, we are likely to see weakness in the Euro Index and improvement in the USD Index on a short-term basis. As mentioned earlier, the USD Index reached its cyclical turning point and, taking this fact into account, it seems that the bottom of the current correction is already in. Additionally, the euro corrected exactly 61.8% of its October-November decline and approached the short-term rising support line without breaking it, which means that the move up is quite likely over. Therefore, currently, the implications for the precious metal market are bearish.

To make sure that you are notified once the new features are implemented, and get immediate access to our free thoughts on the market, including information not available publicly, we urge you to sign up for our free gold newsletter. Sign up today and you'll also get free, 7-day access to the Premium Sections on our website, including valuable tools and charts dedicated to serious Precious Metals Investors and Traders along with our 14 best gold investment practices. It's free and you may unsubscribe at any time.

Sunshine Profits enables anyone to forecast market changes with a level of accuracy that was once only available to closed-door institutions. It provides free trial access to its best investment tools (including lists of best gold stocks and silver stocks), proprietary gold & silver indicators, buy & sell signals, weekly newsletter, and more. Seeing is believing.

Disclaimer

All essays, research and information found above represent analyses and opinions of Przemyslaw Radomski, CFA and Sunshine Profits' associates only. As such, it may prove wrong and be a subject to change without notice. Opinions and analyses were based on data available to authors of respective essays at the time of writing. Although the information provided above is based on careful research and sources that are believed to be accurate, Przemyslaw Radomski, CFA and his associates do not guarantee the accuracy or thoroughness of the data or information reported. The opinions published above are neither an offer nor a recommendation to purchase or sell any securities. Mr. Radomski is not a Registered Securities Advisor. By reading Przemyslaw Radomski's, CFA reports you fully agree that he will not be held responsible or liable for any decisions you make regarding any information provided in these reports. Investing, trading and speculation in any financial markets may involve high risk of loss. Przemyslaw Radomski, CFA, Sunshine Profits' employees and affiliates as well as members of their families may have a short or long position in any securities, including those mentioned in any of the reports or essays, and may make additional purchases and/or sales of those securities without notice.

In our latest free essay, we focused on silver. We wrote: "the outlook for silver remains bearish and further declines should not surprise us." On the same day, after the essay was posted, silver declined sharply moving very close to the declining support line that we had featured in that essay. On a side note, it was actually a long-term support line that stopped the decline (for now).

With so much volatility this week, we have decided to zoom out a bit and take a look at the markets from the long-term perspective. Is the final bottom in for gold, silver and mining stocks? We have prepared 3 charts for you today that should help us deal with this issue. Let's start with the Dow-to-gold ratio (charts courtesy of stockcharts.com).

(click to enlarge)

That's one of the most important and useful ratios there are as far as long- and medium-term trends are concerned. In particular, the big price moves can be detected before they happen (note the breakout in the first months of the year that heralded declines in gold).

In Tuesday's Market Alert, we wrote the following:

The Dow-to-gold ratio moved above the 12.5 level - to 12.56. The breakout is small and unconfirmed by the moment, but we are one step closer to the next (and probably final) plunge in the precious metals sector.

With the ratio even higher today, we have a good possibility that the breakout will be confirmed and that we will see a big drop in the price of gold in the coming weeks or months.

Having discussed the above, let's move on to the chart featuring junior mining stocks. This is actually the only somewhat bullish chart that we feature today. This might seem encouraging, until you consider the fact that the previous small breakouts turned out to be fake moves and led to even bigger declines.

Although the juniors sector moved above the declining resistance line, we think that it's still too early to say that the breakout has been truly confirmed - especially when we take into account the position of the RSI.

Please note that the last two times when the indicator reached these levels, major medium-term tops were formed. Therefore, we would need to see a verification of the breakout first to view it as an important medium-term signal. This would be the case in any other breakout as well, but in case of the above chart, waiting for a verification seems particularly justified because we have already seen a false breakout at the beginning of this year - one which was followed by a significant decline in the entire precious metals sector.

Since we wrote the above, juniors have declined (in the preceding two weeks and also this week) and they look like they are about to invalidate the previous breakout, which would - naturally - have bearish medium-term consequences for the entire precious metals sector.

If the decline that we are likely to see in the precious metals sector takes juniors back below their declining red support/resistance line, we will have one more indication that the next major move will be to the downside.

Please note that in case of the junior mining stocks the next significant support is much below the current value of the TSX Venture Index, so the coming decline will likely be very significant.

Finally, we would like to discuss the current situation with the gold-stocks-to-gold ratio.

(click to enlarge)

On the above chart, we see that the situation has deteriorated in recent days. Since the beginning of the week, the HUI-to-gold ratio has declined and hit a fresh monthly low on Thursday. Despite this drop, the gold-stocks-to-gold ratio is still above its previous 2013 lows.

From this perspective, the downtrend remains in place, and it will remain in place as long as the HUI-to-gold ratio stays below the declining resistance line. Since the ratio is not that close to it, it doesn't seem that we will see a breakout soon. In fact, we don't expect to see one before another major plunge in the precious metals sector.

Summing up, the final bottom for the decline in gold, silver and mining stocks doesn't seem to be in just yet. Consequently, jumping in with both feet into the gold market might not be the best idea right now. Still, when and how that bottom is reached is a different matter and we encourage you to keep an eye out for technical signs that could help you not only enter the market at the right moment, but perhaps make money also while metals and miners decline.

To make sure that you are notified once the new features are implemented, and get immediate access to our free thoughts on the market, including information not available publicly, we urge you to sign up for our free gold newsletter. Sign up today and you'll also get free, 7-day access to the Premium Sections on our website, including valuable tools and charts dedicated to serious Precious Metals Investors and Traders along with our 14 best gold investment practices. It's free and you may unsubscribe at any time.

Sunshine Profits enables anyone to forecast market changes with a level of accuracy that was once only available to closed-door institutions. It provides free trial access to its best investment tools (including lists of best gold stocks and silver stocks), proprietary gold & silver indicators, buy & sell signals, weekly newsletter, and more. Seeing is believing.

Disclaimer

All essays, research and information found above represent analyses and opinions of Przemyslaw Radomski, CFA and Sunshine Profits' associates only. As such, it may prove wrong and be a subject to change without notice. Opinions and analyses were based on data available to authors of respective essays at the time of writing. Although the information provided above is based on careful research and sources that are believed to be accurate, Przemyslaw Radomski, CFA and his associates do not guarantee the accuracy or thoroughness of the data or information reported. The opinions published above are neither an offer nor a recommendation to purchase or sell any securities. Mr. Radomski is not a Registered Securities Advisor. By reading Przemyslaw Radomski's, CFA reports you fully agree that he will not be held responsible or liable for any decisions you make regarding any information provided in these reports. Investing, trading and speculation in any financial markets may involve high risk of loss. Przemyslaw Radomski, CFA, Sunshine Profits' employees and affiliates as well as members of their families may have a short or long position in any securities, including those mentioned in any of the reports or essays, and may make additional purchases and/or sales of those securities without notice.

Looking at the chart of silver from today's point of view, we see that at the end of the previous week, the white metal (similarly to gold) moved higher after Federal Reserve Chair Nominee Janet Yellen told that monetary stimulus tools shouldn't be removed too soon. If you recall, several days ago we wrote that gold could move higher but that that would just be a counter trend move and would likely be followed by further declines. On Monday, two top Fed officials from opposite sides of the policy spectrum, fueled expectations that the Federal Reserve could taper its bond buying program. Their comments pushed the price of silver to slightly above $20. Although yesterday Bernanke said that the Fed will maintain ultra-easy monetary policy for as long as needed, silver extended declines for a second session and hit a fresh three-month low. This, by itself, is a sign of weakness.

Please note that the price of the white metal is down approximately 33% this year, to some extent on concerns the Fed would begin cutting back its easy-money policy by trimming its $85-billion monthly bond purchasing program. To some extent, because the reasons didn't have to be fundamental, they could have been emotional/technical (silver got ahead of itself and needed to correct before rallying once again). In other words, there could have been a catalyst that has been undetectable using traditional fundamental analysis, which is why even long-term investors shouldn't forget to monitor the charts (or get in touch with someone who does).

Taking the above into account, today investors are turning their attention to the minutes of the Fed's October meeting, as well as a speech by Chairman Ben Bernanke and probably wondering what's next. What impact could the Fed minutes have on the price of silver? Let's see what the market thinks.

In today's commentary, we examine long- and short-term charts of silver to find out what the current outlook for the white metal is. We will start with the analysis of silver from the long-term perspective (charts courtesy by stockcharts.com).

(click to enlarge)

At the beginning of the previous week, silver dropped below the previous October lows (even taking intra-day lows into account). Moreover, the white metal not only confirmed the breakdown below the rising support line, it also moved below the 61.8% Fibonacci retracement level based on the June-August rally ($20.80). This means that the upward correction might already be over.

On Friday, the breakdown below the 61.8% Fibonacci retracement level was confirmed as silver closed below this level for the third consecutive trading day. This made the situation more bearish.

Please note that the RSI indicator is not oversold at this time, so we might see significant declines in the coming weeks (it's not that RSI is suggesting that at this time, but it doesn't "say" that it's unlikely).

Finally, the support line based on the 2008 and 2013 lows creates an initial downside target - something that silver is likely to reach (and pause / bounce) before moving to our final target level around the $16 level. At this time, this initial target is very close to $19.50.

This week, we didn't see any improvement. Instead, silver declined once again, confirming the bearish outlook.

Let's move to the short-term chart to see the very recent price moves more clearly.

(click to enlarge)

On the above chart, you can see the breakdown below the 61.8% retracement more clearly.

There are also other interesting things visible on this chart. We can see that the recent decline in the SLV ETF materialized on significant volume, which suggests that it was no accident. Interestingly, we saw something similar (a visible but not huge plunge) in early June, which preceded the real downswing and investors had several days to prepare.

The second interesting thing that we can see above is the downside target for the SLV ETF, very close to the $19 level. The target is created by the red dashed line, which is a parallel line to the declining resistance line based on the most recent local tops. It is more or less in tune with the initial target for spot silver at $19.50.

Summing up, taking into account the above analysis, we can conclude that the outlook for silver remains bearish and further declines should not surprise us. We would like to stress that our price target levels are something that we view as very likely (meaning that they are very likely to at least stop the decline for a while when they are reached) at the moment of posting this essay, but given this month's volatility, it could be the case that these targets will be adjusted shortly.

To make sure that you are notified once the new features are implemented, and get immediate access to our free thoughts on the market, including information not available publicly, we urge you to sign up for our free gold newsletter. Sign up today and you'll also get free, 7-day access to the Premium Sections on our website, including valuable tools and charts dedicated to serious Precious Metals Investors and Traders along with our 14 best gold investment practices. It's free and you may unsubscribe at any time.

Sunshine Profits enables anyone to forecast market changes with a level of accuracy that was once only available to closed-door institutions. It provides free trial access to its best investment tools (including lists of best gold stocks and silver stocks), proprietary gold & silver indicators, buy & sell signals, weekly newsletter, and more. Seeing is believing.

Disclaimer

All essays, research and information found above represent analyses and opinions of Przemyslaw Radomski, CFA and Sunshine Profits' associates only. As such, it may prove wrong and be a subject to change without notice. Opinions and analyses were based on data available to authors of respective essays at the time of writing. Although the information provided above is based on careful research and sources that are believed to be accurate, Przemyslaw Radomski, CFA and his associates do not guarantee the accuracy or thoroughness of the data or information reported. The opinions published above are neither an offer nor a recommendation to purchase or sell any securities. Mr. Radomski is not a Registered Securities Advisor. By reading Przemyslaw Radomski's, CFA reports you fully agree that he will not be held responsible or liable for any decisions you make regarding any information provided in these reports. Investing, trading and speculation in any financial markets may involve high risk of loss. Przemyslaw Radomski, CFA, Sunshine Profits' employees and affiliates as well as members of their families may have a short or long position in any securities, including those mentioned in any of the reports or essays, and may make additional purchases and/or sales of those securities without notice.

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